Introduction

In commercial transactions, it is common for one company to issue a cheque on behalf of another company—either due to business relationships, group structures, or convenience. However, when such a cheque is dishonoured, an important legal question arises:

👉 Can a cheque issued by one company for the liability of another company attract proceedings under Section 138 of the Negotiable Instruments Act?

The answer depends on whether there exists a legally enforceable debt or liability of the drawer company and the relationship between the parties involved.

Legal Requirement Under Section 138

Section 138 of the Negotiable Instruments Act, 1881 requires:

• The cheque must be issued for discharge of a legally enforceable debt or liability

• The cheque must be dishonoured

• Legal notice must be issued and payment not made within prescribed time

👉 The key issue here is:
Whose liability is being discharged?

Scenario 1: Same Directors in Both Companies

Where both companies have common directors or are closely connected, courts may examine the transaction differently.

Legal Position

• If Company A issues a cheque for Company B’s liability

• And both companies are controlled by the same directors

👉 Courts may treat the transaction as part of a common business arrangement

Key Considerations

• Whether there is an understanding or agreement between companies

• Whether Company A accepted liability (expressly or impliedly)

• Whether the transaction was part of inter-company dealings

Outcome

• Section 138 proceedings are more likely to be maintainable

• The cheque may be treated as issued towards a legally enforceable liability

Scenario 2: Different Directors in Both Companies

Where the two companies are independent and have no common management, the situation becomes stricter.

Legal Position

• Company A issues a cheque for Company B’s liability

• But Company A has no legal obligation to pay

👉 In such cases:

• There may be no legally enforceable debt against Company A

• The cheque may be treated as issued without liability

Outcome

• Section 138 may not be attracted

• Complaint may fail due to absence of legally enforceable debt

Important Legal Principle

Courts have consistently held:

👉 Existence of legally enforceable debt or liability of the drawer is mandatory

If the drawer company is not legally liable, merely issuing a cheque does not automatically attract criminal liability.

Can Third-Party Liability Still Be Covered?

Yes, in certain circumstances:

• If the drawer company has guaranteed the liability

• If there is a written agreement or acknowledgment

• If the cheque is issued with clear intention to discharge liability

👉 In such cases, liability under Section 138 may still arise.

Practical Example

Case 1 (Same Directors)

• Group companies with common management

• One company issues cheque for another

• Liability recognized → Section 138 applicable

Case 2 (Different Directors)

• Independent companies

• No agreement or liability

• Cheque issued as accommodation → Section 138 may fail

Liability of Directors Under Section 141

Under Section 141 of the Negotiable Instruments Act, 1881:

• Directors responsible for company affairs may be prosecuted

• Liability depends on role and responsibility

👉 Common directors may face exposure in both companies.

Key Factors Courts Examine

Courts typically look at:

• Existence of legal liability

• Nature of relationship between companies

• Documentary evidence (agreements, invoices, emails)

• Conduct of parties

• Purpose of issuing cheque

Conclusion

The fate of a cheque issued by one company for another’s liability under Section 138 depends primarily on whether the drawer company had a legally enforceable obligation.

• If companies are closely connected and liability is established → Section 138 may apply

• If companies are independent and no liability exists → proceedings may fail

Each case depends on facts, documentation, and the nature of the transaction.

Frequently Asked Questions (FAQs)

Q1. Can a cheque be issued for another company’s liability?

Yes, but liability under Section 138 depends on whether the issuing company has a legally enforceable obligation.

Q2. Is Section 138 applicable in third-party liability cases?

It may apply if the drawer company has accepted or undertaken the liability.

Q3. What if there is no agreement between the companies?

In absence of agreement or liability, Section 138 may not be maintainable.

Q4. Does having common directors affect liability?

Yes. Courts may consider common control as a factor in determining liability.

Q5. Can directors be personally liable?

Yes, if they were responsible for the conduct of the company’s business.

Q6. Is issuing a cheque alone sufficient to prove liability?

No. There must be a legally enforceable debt or liability.

Disclaimer

This article is intended for general informational purposes only and does not constitute legal advice. Liability under Section 138 depends on the specific facts and evidence of each case. Readers should seek professional legal guidance before taking action.